Lack of confidence a drag on truck orders

Sean Kilcarr, senior editor | Jun 11, 2012

Some industry analysts believe that a major reason for the current slump in heavy truck orders and sales is due largely to a growing lack of confidence in the direction of the U.S. and global economy, rather than the in the fundamentals of the freight market – which, in many respects, are more solid than many think.

“It’s really a confidence issue,” Kenny Vieth, president and senior analyst with ACT Research, told Fleet Owner. “Freight volumes are still growing, though slowly, but more importantly truckers are making money hauling it – that’s way more important than what the actual freight volume numbers themselves are.”

Vieth contends that carriers large and small still need to buy new units due to the age of their current fleet, with such “replacement demand” continuing to drive both orders and sales this year. However, the higher cost of new equipment is making it difficult for those carriers seeking to purchase assets with credit versus cash buyers.

“All the fundamentals are there – decent freight volumes, trucking profitability, and an aging fleet in need of new equipment. All the boxes we need to check are checked off,” he explained. “So it gets to a concern over risk, especially for credit buyers.”

Back in the day, Vieth said, a basic Class 8 truck cost $100,000. But now, with all the emissions technology, the base model is $125,000 or higher. On top of that, [diesel] fuel is more expensive, costing 37 cents more per gallon on average in the first quarter this year versus the same period in 2011.

“Then the overall economy gets factored in, and all the metrics are below expectations,” he pointed out. “[Thus] the issue appears to center on credit-buying truckers’ confidence in the economy relative to the risk of taking out a sizeable loan.”

Yet Vieth also stressed other statistics ACT tracks indicate the recent dip in Class 8 orders is a confidence rather than freight related issue and thus could change in coming months.

The biggest such factor is the order cancellation rate, which is exceptionally low relatively to the unstable economic periods in the past, he noted. “Back in 2009, the [order] cancellation rate shot up to 4% or 5%; right now, however, it’s around 1.5% – as low as it’s ever been,” Vieth said.

Eric Starks, president of FTR Associates, added that the recent downturn in Class 8 orders should not obscure the fact that orders overall are “healthy” relative to past production levels.

That’s important to keep in mind, he said, even though the annualized order numbers for March, April and May now calculate out to 216,700 units, which is significantly lower than the 308,000 annualized rate recorded from the December through February time-frame.

“It is important to note that even with the recent slowing in order activity, the levels are still relatively healthy for the industry,” Starks stressed. “Over the next few months we expect orders to remain near current levels, as the summer is traditionally a slower time of the year for order activity.”